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Bernstein Explains Amazon's 'Prime Now' Service

COST, SWYDF, WMT, CVS, WBA, TGT, AMZN, KR | September 15, 2016

Bernstein believes Amazon.com, Inc. (NASDAQ: AMZN) Prime Now could play a crucial role in consumer packaged goods (CPG) sales. Bernstein analysts led by Carlos Kirjner have analyzed seven retailers' thousands of locations where Prime Now is available.

The seven retailers were:

Costco Wholesale Corporation (NASDAQ: COST).
CVS Health Corp (NYSE: CVS).
Kroger Co (NYSE: KR).
Safeway Inc (NYSE: SWY).
Target Corporation (NYSE: TGT)
Walgreens Boots Alliance Inc (NASDAQ: WBA).
Wal-Mart Stores, Inc. (NYSE: WMT).

"We analyzed every one of the thousands of store locations of 7 retailers [...] and, as one would expect, retailers whose store network tend to be less urban (e.g., Walmart) are significantly less exposed than those whose store footprint is more urban (e.g., Safeway or Costco)," the analysts told clients in a note.

Amazon Prime Now has assumed importance since it is available to over 20 million households (18 percent of American households) following its aggressive promotional activities. The brokerage believes it has finally reached beyond the experimentation stage. Therefore, the management expects its investments on Prime Now "to be ‘NPV positive."

Bernstein said, "Prime Now allows Amazon customers to make incidental, fill-in purchases of items whose need is more immediate – like consumer packaged goods (CPG). It expands Amazon's wallet share of its more than ~60M Prime users and attacks one of the last shopping occasions for which online could not compete effectively with brick and mortar retail."

The brokerage pointed out that Prime Now's assortment is rich in CPG, as well as, the items purchased at the eleventh hour. That is primarily because those orders could not be addressed by e-com firms with a delivery window of one or two days. The lead analyst sees "fill-in items" purchase between $50 and $100 billion.

The brokerage retained its Outperform rating with a price target of $1,000 on Amazon shares.

At time of writing, Amazon was flat on the day at $761.09.

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